What Is the Financial Accelerator?

The financial accelerator is a concept that has to do with movement within financial markets. Essentially, this concept holds that by making deliberate changes in the market, it is possible to influence the future movement of that market, sometimes expediting or accelerating movement in a desired direction. The general idea with a financial accelerator is to assess where the market currently stands, identify the direction that would be most advantageous for everyone involved, then identify what changes would more rapidly move the market in that direction.

There are a number of ways to use the concept of a financial accelerator. Governments will often use this basic strategy when attempting to nudge the economy in a certain direction. For example, a government may choose to work through its central bank to increase or decrease interest rates as a means of moving one or more markets in the economy in a desirable direction. By making small changes that in turn affect how individuals and companies participating in the economy spend money, it may be possible to move the national economy away from an undesirable phase that would include a recession, while still avoiding an extreme move that would result in high inflation.

At its best, the financial accelerator serves as a means of keeping an economy on a stable course, without the need to endure extreme shifts that can cause a great deal of distress. Even if circumstances are too advanced to completely avoid a recession or a period of inflation, using some type of financial accelerator may have lessen the effect of that adverse period, allowing both households and industries to endure only minimal discomfort during that period. As a result, households are less likely to experience events such as mortgage foreclosures, while companies may be able to get through the period without shutting down facilities or having to lay off or fire significant amounts of the work force.

The key to making use of a financial accelerator is to accurately assess current market conditions and competently project the direction that the economy will move in without any intervention. From there, it is possible to determine the outcome of the current movement and decide if there is a need to introduce some small change in order to either expedite a desirable outcome or to move the economy in a direction that is more desirable. Care must be taken before applying any type of financial accelerator to a market or markets within an economy, since a miscalculation could have the effect of making an impending bad situation even worse.